Breakthrough on Ireland’s bank debt?

According to a statement issued at 4am (Irish time), eurozone leaders pledged to “examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme.”

It must be galling for Jim Allister that he’s not seeing on the news every night the euro crisis centred on Ireland’s economic woes, as he would never be of the air gloating about it.In fairness to other unionist politicians, they haven’t been making much hay of it.

Brian Walker

Good news, but it’s very early days to assess it. As the Irish Times reports, there was an euphoric reaction from the Taioseasch.

“Mr Kenny said the agreement represented a “seismic shift” in European policy and should open the way to “re-engineer the debt burden on our taxpayers”.
“What was deemed to be unachievable has now become a reality and that principle has been established and decided and agreed upon by the council, by the heads of government,” he said in Brussels. “But for us the more immediate impact is that Ireland is named as getting equal treatment as other countries with difficulties here. “That means that heads of government’s decision will now be referred to the eurogroup for an analysis of how best this might be used in Ireland’s case to re-engineer the debt burden that is on our taxpayer, which is what we set out to do.”

On Ireland the summit pledged “to further improve the unsustainability of the “well performing adjustment programme.”

How fundamental is that?. Previous debates on the issue suggested that the “sovereigns “ i.e. the States, would still have to act as the guarantors to packages delivered direct to the banks. And all Irish banks unlike Spanish banks are bust.

How big a difference will it make?

How quickly can new deals result in new bailout payments? Not before the end of the year

How much money will be in the kitty after the big boys in Spain and Italy have been cut their slices?.

Ireland may be unlucky. Having been the first of the series to get a bailout and being seen to have managed it well in Eurozone terms, might the Irish now come in last to get a review?

The FT reports the summit as an ambush by France Spain and Itay on the Germans. And Mrs Merkel rushing home for a vote hasn’t spoken yet.
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“The agreement will result in EU bailout funds eventually being injected directly into teetering Spanish financial institutions, meaning Madrid can sweep the burden of the bailouts off its sovereign books.

The change, agreed as part of a deal struck in the early hours of Friday morning, will not happen immediately, however. Instead the leaders agreed it would come only after the eurozone set up a single banking supervisor to be run by the European Central Bank.
Ireland, which suffered a similar bank meltdown to Spain, would also be considered for similar treatment, the summit agreed

Both Italy and Spain had agreed the growth measures with France and Germany at a meeting last week and continued to support them but refused to sign off on them as a bargaining tactic.
“They simply held the whole thing hostage,” one eurozone diplomat said. “They won’t accept the growth pact until they get their short-term measures.”

Mack

Here is the full statement – Difficult to tell exactly what it will mean in practice but I think it should be viewed positively for now –

EURO AREA SUMMIT STATEMENT – 29 June 2012 –
• We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution- specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.
• We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.
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EN
• We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding. We welcome that the ECB has agreed to serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner.
• We task the Eurogroup to implement these decisions by 9 July 2012.

Mister_Joe

On Ireland the summit pledged “to further improve the unsustainability of the “well performing adjustment programme.”

Typo?

Neville Bagnall

Early days, but promising.

Splitting bank from sovereign debt will go a long way to getting us back into the markets. So might ESM bond purchasing. A second bailout might yet be avoided.

However, Hollande’s financial transaction tax won’t be welcomed in the IFSC. Plus the implications for the domestic banking sector could be interesting to say the least.

Germany blinked, and the logjam is shifting, but the other shoe (Bundestag) has yet to drop. The Core-Periphery competitiveness problem remains – Grexit is still hovering about. It’s a good start on the legacy of the SGP and market failures, but the long term structures are as nebulous as ever.

Still – promising.

Alias

At best it is an accounting exercise aimed at transferring future borrowing (needed to prevent eurosystem banks based in Ireland from defaulting to eurosystem banks based in the rest of the EU) from the government’s books to the banks’ books. However, the state will still be required to underwrite any additional borrowing by the banks and the borrowing will still be repaid from the same ultimate source, i.e. the citizens of Ireland.

As the EU pointed out, the deal has the purpose of enduring “the financial stability of the euro area” and Ireland’s redundant national interest will continue to be sacrificed for that predominant purpose.

Alias

As Constantin Gurdgiev points out, the ‘extra’ money might have been spent already>

Update: some interesting thoughts – it appears from the EU statement that any euro area member state in compliance with fiscal constraints can apply for ESM funding of the banking sector measures. Now, if – as the Irish Government are claiming – such funding can be applicable to restructuring past sovereign exposures to banking sector, then:

•As Belgium is already starting to signal, it can be applied to €4 billion spent on Dexia Banque Belgique plus €54 in guarantees extended to the bank (link covering more current exposures potential), plus €6 billion in Franco-Belgian assistance the bank received back in 2008 (link).
•Germany’s €150 billion ‘rescues’ of Hypo and other banks via FMS (link here)
•Austria – same Hypo (link here) but peanuts so far
•Dutch Government pumped some €32 billion into its banks (link)
•and so on…

Now, give it a thought – ESM is supposed to run at €500 billion absorbing existent EFSF up to €700 billion. So even if Spain just caps EFSF and it transfers to ESM, we have – before Italy comes waltzing in – ESM full capacity potential left after the banks bailouts are retrospected into it – of what? Some €200 billion max?.. or absent EFSF – at the announced running volume – nil.

This sort of suggests there is serious problem with an idea of allowing retrospective roll-backs of banks-related debt and measures to ESM…

aquifer

Ireland as the poster child for austerity programmes.

With Spain and Italy in the balance it is worth paying Ireland the appearance fee.